How to Properly Leave Your Financial Advisor

It is common for individuals to reassess their financial strategies and relationships with professionals as their life circumstances evolve. Deciding to move on from a financial advisor is a personal choice, often driven by changing financial goals, a desire for different services, or a re-evaluation of fee structures. This process, while seemingly complex, can be managed efficiently with careful preparation and understanding of the steps involved. Navigating this transition effectively helps ensure financial continuity and alignment with current objectives.

Gathering Essential Information

Before initiating any formal steps to depart from a financial advisor, it is important to compile a comprehensive collection of information. This preparatory phase involves identifying all accounts managed by the advisor, which may include brokerage accounts, various retirement accounts like Individual Retirement Arrangements (IRAs) or 401(k)s, and potentially trust accounts. For each account, knowing the specific account numbers and current balances is necessary to provide an accurate overview of your holdings.

Understanding the existing fee structure is also a significant aspect of this preparation. Financial advisors typically charge in several ways, such as a percentage of assets under management (AUM), often ranging from 0.25% to 1.75% annually. Some advisors may also charge flat fees for specific services, or hourly rates. Additionally, commission-based fees may apply for certain product purchases.

Locating and reviewing the advisory agreement or contract is another important step. These documents contain specific clauses regarding termination, including any required notice periods and procedures for transferring assets or settling outstanding fees. For instance, some agreements may specify that fees are prorated through the termination date, with any prepaid, unearned fees being refunded.

Obtaining recent account statements, trade confirmations, and tax documents, such as IRS Forms 1099, is also advised to have a clear record of your financial history and performance. Having all this information readily available helps streamline the subsequent stages of the transition and provides a clear picture of your financial standing.

Initiating the Departure Process

Once all necessary financial information has been thoroughly gathered and reviewed, the next step involves formally notifying your financial advisor of your decision. While a phone call might seem like a direct approach, it is generally recommended to follow up any verbal communication with a written notice, such as a formal letter or email. This creates a clear record of your intent to terminate the relationship and the date of notification.

The written notification should explicitly state your intention to end the advisory relationship and request any necessary forms for account transfer. Some advisory agreements may specify a required notice period for termination, and adhering to this stipulation can help ensure a smooth process and avoid potential complications.

If you are transitioning to a new financial advisor, the new firm can often assist in managing this initial notification and the subsequent transfer process. They typically have established procedures and forms to facilitate the movement of assets, which can alleviate some of the administrative burden on your part. This can make the process less awkward and more efficient, as the new advisor will typically initiate the transfer request on your behalf.

Managing Asset Transfers

The actual movement of assets from your former advisor’s firm to their new destination involves several methods and considerations. The most common method for transferring brokerage accounts is the Automated Customer Account Transfer Service (ACATS), an electronic system designed to standardize and expedite the transfer of assets between brokerage firms. This system allows for the direct transfer of securities, such as stocks, bonds, and mutual funds, without the need to liquidate them first.

There is a significant difference between an “in-kind” transfer and liquidating assets to transfer cash. An in-kind transfer moves your existing securities as they are, which can help avoid immediate capital gains taxes that would be triggered by selling appreciated assets. For example, if you hold shares that have increased in value, an in-kind transfer allows you to retain those shares and defer any tax liability until they are eventually sold. Conversely, if you choose to liquidate assets, they are sold, converted to cash, and then the cash is transferred, potentially leading to immediate tax consequences if gains are realized.

Transfers can be either full, moving all securities and cash, or partial, moving only specific assets. While ACATS transfers are typically efficient, generally completing within 5 to 7 business days from the time the transfer request is submitted, some transfers may take longer, especially if specific issues arise or if the delivering firm does not use ACATS. The delivering firm has one business day to validate the transfer request and three business days to complete the transfer of assets after validation.

Non-transferable assets, such as proprietary products or certain illiquid investments not supported by the receiving firm, may require special handling. In such cases, these assets might need to be liquidated, or you may need to leave them with the former firm. Tracking the transfer process is important, and you should inquire about typical timelines and what steps to take if unexpected delays occur.

Finalizing the Transition

After the assets have been successfully transferred to your new account or self-managed platform, the final steps involve confirming the complete closure or transfer of all accounts with the former firm. This includes verifying that all assets, including any fractional shares or residual cash balances, have been moved or properly accounted for. It is advisable to obtain a final statement or written confirmation from the former advisor indicating that your accounts are closed and that no lingering assets remain under their management.

Reviewing all final statements and documentation from the former advisor is an important step to ensure that all fees have been settled correctly and that there are no outstanding charges. This includes checking for any termination fees, which some firms may charge, or any pro-rata fees for services rendered up to the date of termination. Any discrepancies in account balances or unexpected fees should be promptly addressed with the former firm.

Updating your personal financial records to reflect the change in advisor or account location is also necessary. This ensures that your financial overview remains accurate and that you have a complete record of your investments and their new custodians. If any issues or discrepancies arise after the transfer is complete, such as missing assets or incorrect cost basis information, promptly contacting both the former and new firms is important to resolve them.